OCC Reports Second Quarter Bank Trading Revenue of $5.2 Billion

WASHINGTON — U.S. commercial banks reported trading revenues of $5.2 billion in the second quarter of 2009, compared to record revenues of $9.8 billion in the first quarter of 2009, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

"After such a strong first quarter, we expected to see a seasonal decline in trading revenues, and indeed that occurred," Deputy Comptroller for Credit and Market Risk Kathryn E. Dick said. "Still, second quarter trading revenues were the sixth strongest since we've been keeping records."

As Ms. Dick noted in previous quarters, trading results continue to be influenced by the reporting of fair value adjustments for derivatives payables and receivables. "On balance, trading results in the second quarter benefited from the significant tightening of corporate credit spreads, as the positive impact of increasing receivable values exceeded the negative impact of increasing payable values," she said.

The OCC also reported that net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $140 billion, or 20 percent, to $555 billion. "Rising interest rates and falling credit spreads have combined to reduce the fair values of both derivatives receivables and payables," Ms. Dick said. "As a result, we have seen material reductions in net current credit exposure over the past two quarters, although by any standard these exposures remain very high."

Ms. Dick noted that concerns about counterparty credit exposures have driven bank supervisors to continue to encourage banks to increase the volume of derivative contracts cleared by central counterparties. "The use of central counterparties is an important step forward in addressing the systemic risk of large counterparty credit exposures," she said.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $1.5 trillion (nearly 1 percent) in the second quarter to $203.5 trillion. Interest rate contracts increased $2.5 trillion to $172 trillion, while credit derivatives fell 8 percent to $13.4 trillion.

The report also noted that:

Derivatives contracts are concentrated in a small number of institutions. The largest five banks hold 97 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.

Credit default swaps are the dominant product in the credit derivatives market, representing 98 percent of total credit derivatives.

The number of commercial banks holding derivatives increased by 47 in the quarter to 1,110.